February 2018

January FOMC Meeting – Extended discussion of inflation forecasting

Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Unfortunately, they overlook the fact that Phillips Curves do not depict a structural relation. The Phillips Curve is not invariant to monetary policy behavior. In short, it is the Fed that creates the correlations between inflation & unemployment. The Lesson: Phillips Curve analysis is not a reliable…...

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The Week Ending Friday February 16th 2018 Bill Dudley called well the February wobble the week before last – small potatoes. The stock market recovery was underpinned by more “even better than expected” company results. The initial run of “even better than expected” company results had let to a severe overshoot in the S&P500 – until a supposedly good January wage growth figure spooked markets into thinking the Fed may tighten even faster. In addition, the quite generous fiscal spending deal and prospects for an even more generous longer-term spending plan, allied to the already agreed tax cuts, are worrying…...

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The Reagan Deficits, Growth, Long-term Yields, Inflation & the Exchange Rate. Implications for today?

The tax cut signed in December and the two-year budget deal passed on February 9, which served to focus attention on trillion dollar deficits, have affected markets. According to one analyst, reflecting the conventional wisdom: What if you ask the man on the street? Say you were one of those local news programs and left your air-conditioned office and went out on the street and interviewed people randomly, and asked them: “Why is it bad when we run big deficits?” I assure you that not one person would be able to answer your question. The answer, of course, is: it… Read More

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“Just one of those things”

John Fernald, Robert Hall, James Stock and Mark Watson (JF, RH, JS, MW) write “The Disappointing Recovery in U.S. Output after 2009”. The summary: U.S. output has expanded only slowly since the recession trough in 2009, counter to normal expectations of a rapid cyclical recovery. Removing cyclical effects reveals that the deep recession was superimposed on a sharply slowing trend in underlying growth. The slowing trend reflects two factors: slow growth of innovation and declining labor force participation. Both of these powerful adverse forces were in place before the recession and, thus, were not the result of the financial crisis… Read More

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My “funny inflation”

Resulting in “funny” headlines (with time stamps): Barron’s 9:26 AM: “Dow Drops as Too Much Inflation Rocks Stocks.” CNN Money 10:56 AM: “Stocks Shrug Off Inflation Data” The core CPI was 0.3% month-on-month, higher than expected (0.2%) and the highest in two years. Since it wasn’t as low as analysts were anticipating, that “confirms” the “boom hysteria”. David Beckworth put it succinctly: My prediction: Fed will be emboldened to raise rates & talk up more rate hikes. This tightening will cause inflation to drift back below 2%. And Fed officials will wonder once again why inflation remains low....

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Retail Sales: What a “boom” doesn´t look like

Retail Sales in January 2018 rose by a little over 3.5% year-over-year. That followed sharp downward revisions to December. The truth is that almost all the gain was registered during September to November – the hurricane boost. Month-over-month, retail sales declined in January after being revised to flat in December. It´s almost as if US consumers have taken two months off from spending. Obviously not. Rather, retail sales (just as several other statistics) captured the burst of activity triggered by the cleanup and recovery from the severe storms along the Gulf Coast in later summer 2017. In the seven months…...

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Small potatoes

The Week Ending Friday February 9th 2018 Wild, but not so wild. The 5% sell off in equities over the week added to the 3% fall the week before has certainly blown the froth off the stock market. Much better than expected sales and earnings figures had led to an excessively positive reaction in stocks (firstchart) – that has now been partly reversed. The long term forward Price/Earnings ratio (second chart) now looks more normal. And perhaps that is all there is. The news about the spending deal, about wage growth, about rates is all just noise. Stocks had gotten…...

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The last filmy slips of fabric have been stripped away, and macroeconomists must now view the once-romanced US Congress in flagrante delicto with a real paramour: Mr. Big Bucks Deficits. The Congressional Budget Office, the Budget Committees, the Tax Committees, the endless pompous pettifogging about national debts—all tossed overboard on the Washington IOU Love Boat. Worse, Congress is not having a mere wild love affair—they have brought Mr. Big Bucks Deficits to the altar. So Now What? From here, a premise of Federal Reserve monetary policy must be that it takes place alongside $1 trillion annual deficits. For many, the… Read More

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Janet Yellen says farewell and the stock market sheds tears

Many things happened on February 2, the date the employment report for January came out. Before going into that, it´s worth looking at some history. In January 2012, the Fed instituted a formal 2% inflation target. Curiously, from the January 2012 FOMC meeting, extending to the June 2013 FOMC meeting, the Fed anticipated that inflation would undershoot the target! FOMC Meetings from Jan12 to June13 The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. In July 2013, they must have realized that was a dumb thing to say, changing…...

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